Bank of Canada: ETF liquidity risk concerns regulators - report

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OTTAWA (Reuters) - The Financial Stability Board is looking at whether exchange-traded funds could pose a risk to the world’s financial system when interest rates eventually start to go up, a top Bank of Canada official said on Tuesday, according to a Bloomberg report.

The FSB, a regulatory task force for the Group of 20 economies, discussed at a meeting last week whether ETFs based on assets that trade in less liquid markets would be able to honor their obligations in the event of a large withdrawal, said Carolyn Wilkins, senior deputy governor at the Bank of Canada.

“There’s been investments and positions taken that may not have the liquidity there that people expect, especially as interest rates start to normalize,” Wilkins told the news agency.

“So the liquidity illusion, if you want to put it that way, is something that we’re worried about.”

ETFs trade on the market like a stock and track an index, commodity or basket of assets. Some ETFs being examined may include high-yield bonds, said Wilkins, who is Canada’s representative on the Basel Committee on Banking Supervision.